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BRIDLING MARKET DOMINANCE – A View From Jamaica. International Conference on Small States and Economic Resilience Malta – April 23-25, 2007. Barbara Lee Executive Director Fair Trading Commission - Jamaica. STRUCTURE OF PAPER. Introduction Defining “small” Section 1

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bridling market dominance a view from jamaica

BRIDLING MARKET DOMINANCE –A View From Jamaica

International Conference

on

Small States and Economic Resilience

Malta – April 23-25, 2007

Barbara Lee

Executive Director

Fair Trading Commission - Jamaica

structure of paper
STRUCTURE OF PAPER

Introduction

  • Defining “small”

Section 1

  • Major features of the market in a Small State

Section 2

  • An examination of how the Jamaican Competition Law, The Fair Competition Act (FCA) treats with market adjustment
structure of paper cont d
Structure of Paper Cont’d …

Section 3

  • Presents viewpoints on the adequacy of Competition Law for economic development

Section 4

  • Case studies within contrasting legislative frameworks

Section 5

  • Conclusion
introduction
INTRODUCTION
  • DEFINING “SMALL”

(i) World Bank definition – population

(ii) GDP – Chares Webb’s “Competition Law in Small Economies Compared” (2006)

(iii) Free Trade Area of the Americas – Economic vulnerability; levels of development

introduction cont d
Introduction Cont’d…

DEFINING “SMALL” Cont’d …

(iv) The focus of the paper: Dominance in Small

States

  • factors facilitating such dominance
  • Measures to curb it
section 1
SECTION 1

FEATURES OF THE MARKET

IN A SMALL STATE

    • Natural monopolies, largely in utilities
  • Characteristics of Natural Monopolies
    • Large capital outlays
    • Relatively large overhead costs – preventing duplication, therefore competition
characteristics of natural monopolies cont d
Characteristics of natural monopoliesCont’d…
  • appreciable economies of scale and/or scope
  • Succeed in markets not large enough to sustain competition at an efficient scale
  • Rampantly rent-seeking
characteristics of natural monopolies cont d8
Characteristics of natural monopoliesCont’d…
  • Caribbean experience in late 1980s into the 1990s
    • Privatization
    • Liberalization
  • Water, last bastion of the traditional natural monopolies
  • Electricity – competition in generation in Jamaica
  • Natural Gas – monopoly in Trinidad & Tobago and Barbados
  • Telecommunications
    • Fully liberalized in Jamaica March 2003
characteristics of natural monopolies cont d9
Characteristics of natural monopoliesCont’d…
  • Phenomenal growth in the market for mobile telephony in Jamaica
    • 300,000 subscribers in January 2001
    • 2,745,400 by September 2005
  • Monopoly up until 2000
  • Entry of competition in 2000, reaching 60.2% in September 2005
  • Fixed line telephone lagging behind
  • One Licence issued in 2002 but no start-up
    • Cost
    • Chosen technology
  • Need for regulation
    • Curbing the behaviour of the dominant firm
the office of utilities regulation our
The Office of Utilities Regulation (OUR)
  • Established 1995 under the Office of Utilities Regulation Act, 1995
  • Jurisdiction over all utilities
  • Regulates the telecommunications market under the Telecommunications Act of 2000
  • Objects sections include “promoting fair and open competition”
our cont d
OUR Cont’d…
  • Required to consult with the FTC on matters of “substantial competitive significance”
  • To refer such matters to the FTC
  • Dominance under the Telecommunications Act to be determined as per the meaning under the FCA
monitoring competition in the mobile market
Monitoring Competition in the Mobile Market
  • Misleading advertising - Section 37 of the FCA
  • Advertising wars leading to information asymmetries
  • Vertical restraints
  • Abuse of dominance provision
  • Agreements that lessen competition substantially, e.g. sponsorship agreements
beneficiaries
Beneficiaries
  • Individually - sports clubs and sporting activities
    • Various geographic and social groupings
  • Nationally – growth in entrepreneurship
    • Growth in the economy
  • Improved consumer welfare
  • Disciplining of dominant firms

Result of liberalization and unimpeded competition

electricity
Electricity
  • Ministerial Order February 2001
    • Exemption of the encumbent from the FCA
  • Power of Minister – Section 3(h) of the FCA
  • Relationship between independent producers and the encumbent
  • Affecting determination of price

Despite the introduction of competition in

generation no evidence of enhanced consumer

welfare

factors supporting dominance creating barriers to entry
Factors Supporting Dominance & Creating Barriers To Entry
  • Strong social and family ties
  • Difficulties in obtaining credit
  • Cultural allegiances
    • E.g. Red Stripe Beer in Jamaica
  • Transportation costs, especially for an island
factors supporting dominance cont d
Factors Supporting Dominance …Cont’d…
  • Bulk buying through dominant firms
  • Government policies
    • State aid
    • Concessions
    • Tax breaks
    • Preferential awards of contracts
  • Legislation
    • Intellectual property rights vis-à-vis dominant firms
    • Antidumping and Subsidies Laws
section 2 dominance under the fca
SECTION 2DOMINANCE UNDER THE FCA
  • Definition
    • A firm is dominant if

“… by itself or together with an interconnected company, it occupies such a position of economic strength as will enable it to operate in the market without effective constraints from its competitors or potential competitors”

    • The offence is the abuse
why would a dominant firm need to be constrained
Why would a dominant firm need to be constrained?

United States vs Aluminium Co of America (Alcoa) 1945

  • Such a firm can restrict output
    • Raise prices
    • Transfer income from customers to producers
  • Thereby excluding rivals from the market “by means other than superior performance in the form of better products, prices and service”
structure vs conduct remedies
Structure vs Conduct Remedies

STRUCTURE

  • Role of merger control in preventing anti-competitive levels of concentration in the market
  • Omission of merger control provisions from the FCA
  • Rationale
    • Jamaica’s level of economic development
    • Relatively small size of many of its firms
structure cont d
Structure Cont’d…

Is there any merit to the argument?

Kovacic et al think that mergers can

  • Bring superior managerial and/or technical skill to bear on underused assets
  • Yield economies of scale and scope, reducing cost, improving quality and boosting output
structure cont d21
Structure Cont’d…
  • Discourage incumbent managers from behaving perversely, fearing the possibility of a hostile takeover
  • Facilitate sale of a business to the “best” buyer at the best price
  • Few risks to competition
structure vs conduct remedies cont d
Structure vs Conduct RemediesCont’d …

CONDUCT REMEDIES

  • Sections 19-21 address the conduct of dominant firms, prohibiting, inter alia
    • Restricting the entry of persons into any market
    • Eliminating any person form any market
    • Improving unfair or selling prices
    • Limiting production … to the prejudice of consumers
justification
Justification
  • Conduct exclusively directed to improving production or distribution
  • To promoting technical or economic progress; and
  • Consumers are allowed a fair share of the resulting benefit
justification cont d
Justification Cont’d…
  • Enforcement of intellectual property rights
  • Superior competitive performance
  • Substantial lessening of competition
  • The FCA therefore
    • Constrains the behaviour of dominant firms yet
    • Promotes innovation and encourages superior competitive performance
section 3 viewpoints on the adequacy of competition law
SECTION 3VIEWPOINTS ON THE ADEQUACY OF COMPETITION LAW
  • Protection of “axial industries”

- Dr Trevor Farrell

  • “… erecting walls and barriers to trade is not the answer”

- Ambassador John K Veroneau

section 4 case studies
SECTION 4CASE STUDIES

(i) Beer Market

  • 2001 Investigation into the beer market – under Sections 17 and 19 the FCA
  • Market share – over 90%
  • Agreements that lessen competition substantially, included:
    • Promotional
    • Sponsorship
    • Demanding sales data on competing brands
beer market cont d
Beer Market Cont’d …
  • Settlement
    • Limiting length of agreements
    • Prohibiting option to renew and/or right of first refusal
    • Relating notice of termination without cause to value of sponsorship
    • Reducing number of outlets
    • Permitting promotion of competing brands
beer market cont d28
Beer Market Cont’d …
  • Current Market
    • Increase in entrant’s annual revenue by some 200%
    • Entry of another competitor in 2006
ii cement industry
(ii) Cement Industry
  • Application of Anti-dumping Laws 2001 - complaint by monopoly producer Carib Cement Company Ltd (CCCL) to the Antidumping and Subsidies Commission (ADSC)
cement industry cont d
Cement IndustryCont’d …

FTC Caution:

  • Overall impact on competition and consumer welfare
  • Weigh protecting one company against cost of consumer and wider economic objectives
  • Value of CCCL’s promise not to raise prices without Government’s approval
cement industry cont d31
Cement IndustryCont’d …
  • Dumping duties of 89.79% imposed
  • 2002 and 2004 – further complaints
  • ADSC recommendation –
    • increase of tariff from 15% to 40%
    • Safeguard measure of 25.83%
  • Market demand – 900,000 tonnes
  • CCCL at 700,000 tonnes – climbing to 844,840 tonnes in 2005 but still inadequate

Specific construction demands

cement industry cont d32
Cement IndustryCont’d …
  • By the middle of 2006 – crisis in the industry
    • tariff rolled back to 15% for three months
    • Tariff removed altogether – indefinitely
    • Importation resumed – 10 companies as at December 2006
  • J$305M paid out in compensation
lessons
Lessons
  • Dangers of picking winners and promoting national champions
  • Competition as a superior mechanism for organizing the economy
  • Trade remedies
      • Last resort
      • Use sparingly
conclusion
CONCLUSION

Benefits of competition law and policy

for states, however small – effective

bridling of dominance to:-

  • Increase entrepreneurship
  • Promote market adjustment
  • Enhance consumer welfare